With only a few days left before 2008 hits us, I thought it was the perfect timing to dive into what Saugatuck Technology just reported as being their SaaS predictions. Their recent research alert highlights five key trends in SaaS for 2008 and beyond:
SaaS platforms and marketplaces will begin to proliferate, becoming a significant channel opportunity for vendors, as well as a key means by which users will gain access to SaaS solution capabilities. During the past several years, SaaS marketplaces and platforms have evolved well beyond their initial capabilities, offering customisation, integration, data pipes for BI or data sharing, data storage, content management, workflow, development tools and APIs. Ecosystems have formed to enrich the value of their offerings through the synergy of functionality brought together on these platforms. SaaS platforms now express a wide range of capabilities that are driven by the business model of the ecosystem and the needs and characteristics of the marketplaces they enable.
SaaS is becoming an international phenomenon, driven by both local demand as well as large multi-nationals who are adopting SaaS business solutions on a global basis. While US SaaS adoption is clearly going “mainstream”, Europe and Asia are only now beginning to experience the steep adoption ramp that the US has witnessed over the past two years. Europe is beginning to go through a very similar adoption profile that the US has – albeit with an 18 month lag. A very strong European growth can be anticipated for US-based SaaS giants aggressively expanding into this region as well as regional and country-specific players. Whereas average US market growth rates will likely slow into the 35-40 percent range in 2008, European market growth rates should exceed 60-70 percent next year.
SaaS merger & acquisition activity will explode. No doubt a serious feeding frenzy is about to unfold and it could be anticipated that a large number of venture-backed start-ups and emerging SaaS companies in the $5 million - $20 million range would be put up for sale over the next 12-18 months – and acquired by either SaaS pure-plays, ISVs hungry to enter the SaaS fray or on-shore & off-shore IT services and BPO providers who are eager to leverage a SaaS model. The upcoming year is an important one where next-generation horizontal and vertical franchises will be cemented.
Traditional on-premise application ISVs will earnestly begin to fight back. Approximately 15-20 percent of ISVs have already either begun new skunk works initiatives or gained access to SaaS assets and development experience through M&A activity. However, over the next 12-24 months, this number is anticipated to rise dramatically, as a tougher economic climate will only exacerbate an already challenged on-premise and traditional perpetual license model. To be successful, ISVs will need to fully understand the journey that they will be on across five key dimensions – economic, technological, operational, organisational and cultural – as well as take advantage of the many best practices available based on the hard-fought experience of early adopters.
SaaS development platforms will evolve and 2008 will see explosive growth in the adoption and use of SaaS-based software development platforms and services, beginning with significant growth in the use of vendor-specific, application-specific, and marketplace/ecosystem-specific development platforms and services. Wide availability of open, standardised tools and technologies in subscription-based, on-demand environments will help streamline and reduce the costs of software development and customisation. It will also foster use and growth of services-oriented architecture development strategies.
Other insights and Strategic Planning Positions provided by the research include the following predictions:
By 2012, 30 percent or more of all new business software will be deployed and delivered as SaaS. 15 percent of SaaS solution revenue will be accessed through SaaS marketplaces. At least 75 percent of the revenue generated by SaaS marketplaces will be driven by five or fewer SaaS platform providers.
By YE2008, greater than 55 percent of North American-based businesses will have deployed at least one SaaS application, with Western European close behind at greater than 40 percent.
60 percent or more of SaaS firms funded prior to 2005 will either be acquired or go out of business by 2010. By 2012, all bets are off as it concerns traditional on-premise licensing schemas.
By 2010, 40 percent of traditional on-premise application ISVs will bring to market SaaS solution offerings, either via acquisition, development of new single-instance multi-tenant applications, or through virtualised (multi-tenant) versions of their traditional on-premise offerings. Less than half of the ISVs in transition will actually succeed.
By YE2008, the number of user enterprises taking advantage of SaaS-based software development platforms, services and offerings will number in the tens of millions worldwide.
These important trends will no doubt shape how the SaaS applications and business services sector will evolve, including changes to how vendors will go to market, as well as how customers will gain value from SaaS solutions.
Recommended reading for further insight on this topic:
Total economic impact of Software-as-a-Service: The foundation of a sound technology investment
Saugatuck's WAVE III Ubiquitous adoption for SaaS will entail strong forces both on the demand and supply chain. At Morph, we eagerly anticipate the proliferation of SaaS vendors, as well as the continued increase in software as a service adoption by business users.
Posted by: Macel Legaspi | January 09, 2008 at 07:22
Hi Christian. The economist published an article on Jan 5 about the profitability of Saas vendors. Apparently none of them are profitable and with the appearance of the classical ISV's on the Saas-market it is the question if they ever will. What is your opinion?
Best regards
Posted by: Marty Huisman | January 16, 2008 at 11:26
Hi Marty,
Thanks for your recent comment.
That's indeed a very good question and this is actually inherent to the SaaS financial model.
While traditional software companies get most of their revenue from the sale of software (and that up front, at the time of the sale), with some additional revenues from maintenance and support, consulting, and training, a SaaS software company has a different revenue picture.
Most of the revenue from a SaaS customer comes in through monthly subscription fees, over the life of the vendor/customer relationship. Only the high quality of the software and the services behind it (requiring substantial upfront investments in infrastructure, security, etc.) keep the revenues coming in. This means that until a SaaS vendor has a large portfolio of customers, revenue will be much less in the short run, although that will be eventually be made up by the continuing revenue stream.
Please also note that one of the costs of moving to SaaS for a traditional software ISV is that company will be running two businesses – the existing traditional software business and the new SaaS business. These businesses will be quite different in many respects – revenue models, overhead costs, support requirements, and sales models.
Also, moving from a traditional software model, selling software to customers for a large up-front fee plus an annual contract for maintenance and support, to the SaaS model, where almost all of the revenue trickles in as monthly subscription payments can be difficult to contemplate, much less successfully achieve.
I would recommend this very interesting white paper, looking at the financial issues of ISVs moving to the SaaS model and considering how to successfully make this challenging move.
http://www-304.ibm.com/jct09002c/isv/marketing/saas/financial_model.pdf
Please do not hesitate to post the details of the Economist article you mentioned as a comment here.
Take care,
Christian
Posted by: Christian Smagg | January 16, 2008 at 14:09
Nice piece and prophetic too, SaaS development platforms are indeed evolving. The NetSuite BOS platform based on open source code could well be the signalling event that will bring together open source and SaaS so that by the end of the year we may well be witnessing a move to open source SaaS.
Posted by: Neophyteblogger | March 01, 2008 at 10:00